Tax Deductible Expenses of Refinancing Your Home
Many homeowners have reduced monthly mortgage payments by refinancing in the past few years. Homeowners have taken advantage of historically low interest rates to shore up finances. In addition to lower interest payments, taxpayers who refinance are also often qualified to deduct the points paid during refinancing. The deduction for points are usually spread over time, however if the loan is repaid the the remaining balance is deductible.
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Points Deduction Details
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Points or prepaid interest spent to refinance a mortgage can be deducted on a monthly basis over the term of the new loan. This is different than when buying a house, when the entire price of the points is deductible the year the house is bought. In practical terms, the effect is a small deduction. According to Kiplinger's, it is 1/30th of the points a year for a 30-year mortgage. Many taxpayers forget to claim this deduction.
Monthly Points Deduction Example
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An example is useful to illustrate the tax deduction of refinancing points. If a taxpayer that refinanced a 30 year mortgage paid $3,000 in points on July 1, 2010, then when taxes are filed six months of the points can be deducted. Half a year's worth of monthly points deduction is $50. The following year the full deduction could be claimed. The taxpayer could deduct $100 a year until the the full $3,000 in points has been deducted.
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Home Improvements
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Taxpayers who cash out when they refinance and subsequently use the proceeds for home improvement can deduct some of the points paid to refinance. The proportion of the points that are deductible equals the ratio of the home improvement costs to the total loan. For example, if a homeowner refinanced a $400,000 loan, and paid $4,000 in points and $100,000 is used for home improvements, then one-fourth of the points are deductible. Therefore $1,000 in points would be deductible in addition to the regular monthly deductions.
Tips And Tricks
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A common mistake is not claiming all the unamortized points from a previous refinance in the year when a second refinance takes place. For example, if a taxpayer has $2,000 of unamortized points remaining and in 2010 and decides to refinance again, the full $2,000 could be deducted on the 2010 tax return. This unamortized points that remain when a house is sold and the mortgage is paid off from the proceeds of the sale can also be deducted.
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